NFP City Index looking for a weakening in jobs growth

Lest we forget that our model was pretty much spot on last month, predicting jobs growth of 220k, vs 222k actual. This was impressive stuff, we shall we have to see if the model works as well later today when payrolls for July are released at 1330 BST. We are predicting a more modest rise in July’s NFP number of 176k, which is roughly in line with consensus of 180k, but would suggest a sharp decline of nearly 50k jobs compared with June.

ISM weakness weighs on our NFP prediction

The key factors that have weighed on our predicted payrolls number for July have been the weakening in the employment components of the Manufacturing and Non-Manufacturing ISM reports for July. The employment component in the Manufacturing ISM fell to 55.2 from 57.2 in June, while the employment component of the Non-Manufacturing ISM fell to 53.6 from 55.8. This outweighed the uptick in the ADP number for last month and the slight decline in the 4-week moving average of initial jobless claims.

Interestingly, economist estimates for NFPs, as measured by Bloomberg, have been roughly stable around the 180-193 mark for the last 5 months, suggesting that the market is expecting fairly stable jobs numbers, even though we have had some large outliers such as April’s 98k and June’s 222k. This is visible in the chart below.

It’s all about the wage growth

From a market perspective there are a few things to watch out for. The strong June payrolls number failed to stem the decline in the dollar last month, the dollar index has fallen 3.7% since the June NFP reading was released. This suggests that the FX market is looking at something else to determine where the buck goes next. We think that the NFP still does matter for the dollar, however, only if it is in unison with wage growth and if we don’t see a revision to June’s solid number.

We believe that the wage component, which we do not forecast, will be the most important piece of data from the labour market report on Friday. If wages only rise by the expected 0.3% on the month, the annual rate is expected to weaken a touch to 2.4% from 2.5%, then it is hard to see how the dollar could stage a meaningful rally, as weak wage growth is likely to hinder the chances of a further rate hike from the Federal Reserve later this year.

Is there another leg lower to come in the dollar?

However, we do note that the dollar has been under intense selling pressure in recent weeks, and appetite to push the buck lower may be weak. Friday’s NFP report is important, as a run of the mill NFP number, combined with relatively stable wage growth may be enough to stem the declines in the dollar, at least in the short term. We have noticed a reluctance to push the dollar index below 92.50, which is now key support. Also, the US 10-year Treasury yield is at a critical level and is hovering just below the 50-day moving average at 2.24%. If the yield breaks below here towards 2.20% then the dollar index could embark on a fresh leg lower. However, if on the back of a relatively stable NFP report (which is what we expect), the market thinks that the dollar is looking too soggy, then we could see a mild dollar recovery into the weekend.  

It is also worth watching USD//JPY, which is the most correlated of the dollar pairs to the NFP report. This pair is hovering around the 110.00 mark, and there seems to be some reluctance to push it below here. How this pair reacts to the NFP report could be a sign of the likely performance of the dollar in the month ahead, with a strengthening in USD/JPY on the back of a decent jobs number a sign that selling pressure could ease.

Due to the recent inverse correlation between the dollar and US stocks, if we see the dollar stage a recovery then US blue chip indices could be at risk from a sell off.

Chart 1: 

Source: City Index